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Chapter 14: Q10Q (page 753)

Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.

Short Answer

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Answer

The amortization of discount on bonds payable will increase bond interest expense for the period such that interest expense surpasses the interest payment to bondholders

Step by step solution

01

Meaning of discount on bonds payable

The organized apportioned of the discount on bonds payable, listed as a debit in a contra-liability account, to bond interest expense over the term of the bonds.

02

Increase in bond interest expense due to amortization of discount on bonds payable

The discount is amortized to interest expense over the duration of the bond, the discount is literally surplus interest expense that is ought to be paid as the contract price of bond was less than the market value on the date of bond issuance.

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Most popular questions from this chapter

(Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

Find the polynomials q(x)andr(x)such that f(x)=g(x)q(x)+r(x),andr(x)ordegr(x)<degg(x):

(a)f(x)=3x4-2x3+6x2-x+2andg(x)=x2+x+1in□[x].(b)f(x)=x4-7x+1andg(x)=2x2+1in□[x].(c)f(x)=2x4+x2-x+1andg(x)=2x-1in□5[x].(d)f(x)=4x4+2x3+6x2+4x+5andg(x)=3x2+2in□7[x].

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company’s fiscal year.

  1. \(10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
  2. \)25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
  3. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

Question: What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?
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